Why looming £2bn benefits black hole can’t be filled by more SNP tax hikes
The SNP’s higher income taxes are raising £1 billion less than they might have done, partly because of slower growth in earnings
Last week my friend and colleague Douglas Ross MSP was thrown out of the Scottish Parliament chamber after heckling the First Minister John Swinney. He had taken exception to Swinney’s deflection – after a serious question from Scots Tory leader Russell Findlay on how farming will have to adapt should the pursuit for net zero continue – with an irrelevant reference to the impact of Brexit.
I can understand Ross’s frustration at the inability to get straight answers from SNP ministers. It all adds to the burden of evidence that Holyrood as an institution is in urgent need of reform to ensure that opposition MSPs are better able to get the answers they need for their constituents, and that ministers can less easily avoid giving serious responses.
Given the inadequacies of the parliamentary chamber, we should be particularly grateful to external bodies such as the Scottish Fiscal Commission (SFC) for the detailed work they do analysing the Scottish Government’s finances. Their latest report, published just last week, contains some stark warnings about the looming black hole in Holyrood funding, as a direct result of SNP policy decisions.
Record funding, crumbling services
We are presently in a scenario where the total amount of money available to Scottish ministers to spend is at record levels, even taking account of inflation. According to the SFC, total Scottish Government funding in the current financial year 2025-26 will be £59.6 billion, around £800 million more than was originally thought. This is against a backdrop of record high taxation across the UK, with even higher taxes in Scotland, again thanks to SNP choices.
And yet, despite all this extra money, all around us we see crumbling public services and cuts being made to vital projects. Something simply doesn’t add up, but the SFC is helping by putting their fingers on some of the reasons for this mismatch.
There are two major drivers of increased spending within the Scottish Budget. The first is the award of above-inflation public sector pay deals which, as the SFC point out, have exceeded the Scottish Government’s published public pay policy. No one would object to public servants receiving more pay if that were in exchange for greater efficiency, but the second part of that equation appears to be missing.
Clever politics?
The other area is around welfare spending. Whilst even the UK Labour government has recognised the risks from an ever-expanding benefits bill, the SNP are heading in the opposite direction. The SFC forecasts that spending on devolved social security payments will increase from £6.9 billion in the current financial year to a staggering £9.4bn in 2030-31. When related to the Barnett Formula funding received from the UK Government, this leaves the Scottish Budget with an estimated £2.1 billion black hole in 2029-30.
Now it is entirely a matter for the SNP to decide they are going to prioritise spending on benefits above other areas such as the NHS, schools, or infrastructure. It may even be clever politics to do so, to help create a body of voters reliant upon those benefits who will, in turn, reward the SNP with their votes.
But none of this helps pay for the ever-expanding cost of benefits in Scotland, which is growing faster than other parts of the UK. And it is clear that SNP ministers have absolutely no idea how they are going to fund this growth.
Increasing taxes further to try and fill the gap is unlikely to be the answer. Already we hear concerns from Scottish business that differential rates of both personal income tax and land and buildings transaction tax (LBTT) make it increasingly difficult to attract higher earners to relocate to Scotland from other parts of the UK.
‘Economic performance gap’
As the SFC points out in their report, higher tax rates are not actually delivering the revenues that were projected. On a straight-line basis, the income tax hikes implemented by the SNP should be raising a net sum of £1.674 billion for the Scottish Government.
But the actual projected income tax net position, compared to what it would have been prior to the devolution of Scottish income tax, is just £616 million. That means there is an astonishing £1 billion gap between what Scotland’s higher income tax rates might have added to the Scottish Budget, and what they are actually projected to deliver.
The SFC refers to this figure as the “economic performance gap”, which is largely made up of slower aggregate earnings and employment growth in Scotland compared with the rest of the UK, alongside effects from Scottish and UK policies, taxpayer behaviour, and differences in the sectoral make-up of the Scottish economy and in the distribution of incomes between Scotland and the rest of the UK.
In simple terms, if the Scottish economy was growing at least at the same rate as the UK as a whole, with similar increases in average earnings, we would have £1 billion more to spend on public services than we currently have, and the SNP would be halfway towards meeting the ever-expanding costs of additional welfare spending.
It once again demonstrates the overriding need for Scottish ministers to focus on economic growth. A faster growing economy, where we could at least match UK average rates, would generate the wealth we need to pay the bills, without the requirement for counter-productive taxes on higher earners which we can see are already having a dampening effect on economic growth.
SNP ministers now have some very serious questions to answer about their tax and spending plans going forward. We can only hope that it won’t take more outbursts in the Holyrood chamber to get the answers we all require.
Murdo Fraser is a Scottish Conservative MSP for Mid-Scotland and Fife
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